Allah's way to finance (part 1)

With interest rates and insurance premiums being such normal concepts for us, it is hard to imagine that for a whopping 25% of the world population the above mentioned are “haram” (forbidden); it is hard to imagine that nevertheless this quarter of the world has a financial industry that grows at an yearly rate of 20%.

After 1000 years of silence and financial regression, the Islamic world,  also thanks to the enormous quantities of liquidity provided by petrol, is moving towards the creation of what could be defined “the economy of the future”. The instability of our own markets is, by contrast, making the “Islamic way” more and more appealing to the western investor.

The pillars of Islamic finance, which are directly taken from the Coran, are aimed at keeping a social economic balance and at avoiding both speculation and the distinction between economy and finance. 

Islamic banking, consistent with the principles of Islamic Law (Sharia), is a participant banking with lenders (banks) being partners and not creditors of the recipient of the loan. An Islamic bank is therefore an intermediary between the saver and the entrepreneur, therefore is more interested in the solidity of the investment than in the credentials of of the debtor (if debtor is really the word to be used). Being in line with these principals it is also clear that the individual saver and bank account holder will never be a creditor of a bank, but either a type of shareholder thus accepting the risk to not see the nominal value of his investment reimbursed, or a checking account holder.

Despite the differences between them, the types of contracts such as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar), that are stipulated between financial institutions, contractors, savers and entrepreneurs to avoid the forbidden Riba are all aimed at enhancing economic growth in a healthy and socially transversal way. 

The redistribution of wealth is something typical in the muslim society, where by law 2/3 of a person's inheritance gets equally distributed between all of the enlarged family members, thereby giving every individual the chance to realistically pursue economic advancement. Is this the "third way", a socially responsible economic and financial system that stands midway between communism and capitalism? Is this the way to foster and enhance a homogeneous growth of society as a whole, without creating the ever bigger gap between social classes that is today's plague but without, at the same time, demotivating citizens to work hard and be productive by not allowing them to be rewarded for it?

What does all this mean for us, western savers and potential investors, scared by the high frequency of financial crises, which are to be mainly attributed to our unhealthy economy and stupidly insane finance?  It means that sukuk is the way to go, and that more generally keeping economy and finance together could be just the medicine that we need. 

Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. A Sukuk constitutes partial ownership in a debt (Sukuk Murabaha), asset (Sukuk Al Ijara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or investment (Sukuk Al Istithmar).  Back in 2006 the Economist already pointed out the great potential of this “new, parallel financial system”, but it still seams to be greatly ignored, or perhaps feared, by the average investor. 

The great appeal of Islamic financial products resides not in their incredible yields but, I would say, in their security, which can make them a great long term investment.